Born from the megamergers of the 1990's, the world's giant oil companies have delivered on their promise. They have cut costs, increased returns and raised profits to records. Now, flush with cash, they find themselves in a paradoxical position - they are making more money than they can comfortably spend.
Thanks to crude prices that averaged $41 a barrel in New York last year, the world's 10 biggest oil companies earned more than $100 billion in 2004, a windfall greater than the economic output of Malaysia. Together, their sales are expected to exceed $1 trillion for 2004, which is more than Canada's gross domestic product.
But even as fears of shortages grow throughout the world and prices remain high, the cash-rich oil companies are not pouring a large portion of their money into their basic business: drilling for oil. Indeed, oil executives, in their second straight year of rising profits, are finding that too much money is chasing too few oil fields. Instead, they are giving much of their cash back to shareholders.
For example, Exxon Mobil, the world's largest publicly traded oil company, earned more than $25 billion last year and spent $9.95 billion to buy back its own stock; Royal Dutch/Shell Group, whose revisions to its oil reserves have left many investors wary, pledged to hand out at least $10 billion as dividends to shareholders this year.
And BP, which earned $16.2 billion in 2004, will return as much as $23 billion to its investors this year and next, mostly as dividends. At the same time, it is cutting capital expenditure for the first time in at least four years, to $14.1 billion in 2005 from $14.4 billion last year.
Other oil companies, like the French giant, Total, plan to report results next week. Altogether, profits in 2004 for the top 10 companies jumped by more than 30 percent from the previous year, when they totaled $80 billion.
Still, oil executives bristle at the suggestion that they are not investing enough and point to new operations in places like Angola or Kazakhstan. Exploration in those places underscores the trend of West Africa and the Caspian Sea taking over from North America and the North Sea as a main focus of exploration and growth for oil companies.
Executives also remember that only six years ago, crude oil futures were trading below $15 a barrel - a third of today's levels. That is a lesson no one is ready to forget.
"We're a cyclical business," David J. O'Reilly, chief executive of ChevronTexaco, the second-largest American oil company, said in a telephone interview, "and at the high end of the cycle it makes sense to get the company in good shape and strengthen our balance sheet.
"History tells us that what goes up also goes down."
Lord Browne, BP's chief executive, said oil companies were doing their job. "Investment is going in, a lot of reserves are being developed," he said in an interview in London. "Looking at the percentage of oil profits reinvested, rather than the amount of cash invested, gives a skewed perspective. I think you have to think of the dollar value."
One reason exploration spending is declining is quite simple - there is less oil left to drill for in places that are open for exploration, like North America or the North Sea, while the bulk of the world's known reserves, mainly in the Middle East, are mostly shut off to foreign investors.
"If they had attractive things to invest in, they'd be investing their little heads off," said Gerald Kepes, a managing director at PFC Energy, a consultancy based in Washington. "Twenty-five years ago, if prices had risen to $45 a barrel, you would have seen everyone in the United States drop everything, jump in a pickup truck, and drill in their backyards. The fact that you don't see this today says a lot. These kinds of easy opportunities have largely dried up."
Last year, the larger integrated oil companies spent about 24 percent of their cash on dividends, 12 percent on share buybacks, and 12 percent on paring debt, Mr. Kepes said. Less than half of their cash, or 46 percent, went into capital spending.
As a share of exploration and production expenses, spending on exploration has declined over the last decade, and now accounts for about 20 percent of the total, compared with about 30 percent in 1991, according to PFC.
"The very easy money-making investments are gone," said Fatih Birol, the chief economist at the Paris-based International Energy Agency. "The problem isn't that there's not enough oil. It's there's not enough opportunities to find oil."
Mr. Birol said that two-thirds of the wells drilled worldwide from 1997 to 2003 were in North America, where production is falling, while the Middle East accounted for 2 percent of global investments.
Early successes in Alaska and in the British and Norwegian areas of the North Sea, both regions developed in the late 1970's and 1980's, are giving way to mature and declining operations in these areas as oil reserves slowly dry up.
At the same time, the Persian Gulf region, which holds the bulk of the world's proven reserves of conventional oil, remains mostly off limits to international investors. In one way or another, Saudi Arabia, Iran, Iraq, Kuwait and the United Arab Emirates limit access to international companies.
High oil prices are not a guaranteed boon for oil companies. When oil prices are low, oil executives are courted by commodity-rich countries to develop national resources. But when prices rise, governments have a tendency to rethink their contracts and seek higher royalties.
That is happening in Venezuela, which is reviewing its operating agreements with foreign oil companies; it is also happening in Russia, where the government is assuming more control of the country's oil industry.
"The net effect of $50-a-barrel oil is to reduce opportunities," said Paul Sankey, an analyst with Deutsche Bank in New York. "Large profits make governments think that they're not taxing sufficiently enough."
For example, the Russian government collects most of the profits when oil prices rise above $25 a barrel. Some countries - including Kuwait, Angola and Iran - put limits on the gains foreign companies can make if prices rise above a certain level. In many production-sharing agreements, for example, oil companies agree to a revenue cap, so that when prices rise, producers must reduce their volumes.
"The industry would much rather have lower oil prices and more stability and a more sustainable environment," Mr. Sankey said. "Record prices mean record revenue, but also too much attention for an industry that basically likes to remain out of sight."
Heather Timmons contributed reporting from London for this article.